Itaú BBA - Trying to stop the deceleration tide

Global Scenario Review

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Trying to stop the deceleration tide

September 13, 2019

Policymakers seem to be responding to deceleration signs, but so far without being able to completely mitigate risks.


Please open the attached pdf to read the full report and forecasts.

Global Economy
Policy responses, but uncertainty remains
Fed rate cuts, more easing by the ECB and additional stimulus in China may attenuate the economic slowdown, but global growth remains at risk, given the obstacles for US and China to reach a trade deal.

Brazil
Slow recovery amid global uncertainty
We continue to forecast 0.8% growth for this year and 1.7% for 2020. We also maintain our exchange rate forecast at BRL/USD 3.80 in 2019 and 4.00 in 2020, but, in the absence of some improvement in the global landscape, the currency may stabilize at a more depreciated level.

Argentina
Reality check
Asset prices plunged after President Macri’s defeat in the primary election. Without access to markets, the government announced yet another Argentine sovereign debt restructuring process and introduced capital controls.

Mexico
The easing cycle begins
We expect Banxico to cut the policy rate by another 25 bps in September, with two additional 25-bp cuts at the subsequent meetings of 2019, bringing the rate to 7.25% by year-end.

Chile
Shock therapy
The central bank cut the policy rate by another 50 bps, to 2.0%, and surprisingly signaled that more easing could come.

Peru
Uncertainty threatens investment outlook
Political developments and social conflicts related to mining activity threaten the investment outlook.

Colombia
Still decoupled from the region
We now see the policy rate stable at 4.25% throughout our forecast horizon, in contrast with the new norm of lower rates across the region.


 

 


Trying to stop the deceleration tide

Global economic indicators are giving further signs that protectionism and the resulting uncertainty are taking a toll on growth – to which policymakers seem to be responding, but so far without being able to completely mitigate risks. Each in their own way, U.S. and China are providing domestic stimuli that will likely prevent both economies from sharply decelerating. However, such responses are altogether unlikely to revert the global slowdown trend. In Europe, the ECB is also responding to the worsening outlook with a new package of measures, but we fear that, alone, the even-looser monetary policy stance may not be enough. Fiscal stimulus from core countries would help, but as yet there is no clear indication that this will take place.

After the latest round of escalation, U.S. and China trade officials are now talking again and making gestures of goodwill – in a somewhat circular succession of events that has already become familiar. There is hope that high-level discussions may take place next month, but we believe a trade deal is still a distant possiblity. Hence, uncertainty regarding global growth is bound to remain high.

In Latin America, the trend of lower rates continued to spread. Mexico and Peru joined Brazil and Chile by cutting rates, but Colombia now seems unlikely to follow, given their wide current account deficit and surprisingly resilient growth. Meanwhile, President Macri’s defeat in Argentina’s primary election triggered a meltdown in asset prices. Without access to markets, the government announced a debt restructuring process and introduced capital controls. As a result, the economy is likely to perform significantly worse than we were previously expecting. Nevertheless, contagion to the rest of the region will be limited.

In Brazil, we have again made very little changes to our scenario. We continue to forecast 0.8% growth in 2019 and 1.7% in 2020, with further monetary easing ahead. We believe that the recent BRL depreciation does not change this outlook, since the resulting pressure on inflation is largely offset by falling commodity prices. As a matter of fact, we now see even lower inflation in this year and the next, due to wide slack and favorable inertia. Finally, we stick for now to our BRL forecasts at 3.80/USD in 2019 and 4.00 in 2020, but we concede that, in the absence of improvement in the global landscape, the currency may stabilize at a more depreciated level.


 

 


Global Economy
Policy responses, but uncertainty remains

• U.S. and China are talking but a deal remains difficult.

• U.S. Fed rate cuts reduce recession risks, but are unlikely to weaken the USD.

• ECB  easing, but a fiscal response is needed.

• China stimulus will likely maintain a gradual slowdown, but not accelerate the economy.

• LatAm: Rate cuts spread in the region; Argentina started a debt-restructuring process.

• Commodities: Agricultural prices hit by trade war.


 

Please open the attached pdf to read the full report and forecasts.



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